The end of hyper-globalization should yield a better alternative

Every market order is supported by narratives, or stories we tell ourselves. This is especially true for the global economy, because, unlike countries, the world has no central government acting as rule-maker and enforcer. Taken together, these narratives help create and sustain the norms that keep the system running in an orderly fashion, telling governments what they should and shouldn’t do. And, when internalized, these norms undergird global markets in ways that international laws, trade treaties and multilateral institutions cannot.

Global narratives have shifted numerous times in history. Under the late-19th-century gold standard, the global economy was viewed as a self-adjusting, self-equilibrating system in which stability was best achieved if governments did not interfere. Free capital movement, free trade and sound macro-economic policies, the thinking went, would achieve the best results for the world economy and countries alike. The gold standard’s collapse and the Great Depression put a significant dent in this benign-markets narrative. The Bretton Woods regime that emerged after World War II, which relied on Keynesian macroeconomic management to stabilize the global economy, gave the state a much more prominent role. Only a strong welfare state could provide social insurance and support those who fell through the cracks of the market economy. The Bretton Woods system altered the relationship between domestic and global interests. The world economy, built on a model of shallow integration, was now subservient to the goals of ensuring full domestic employment and establishing equitable societies. Thanks to capital controls and a permissive international trade regime, countries could create social and economic institutions that suited their individual preferences and needs.

The neoliberal hyper-globalization narrative that became dominant in the 1990s, with its preference for deep economic integration and the free flow of finance, was in many ways a return to the gold-standard narrative of benign and self-adjusting markets. It did, however, acknowledge a critical role for governments: to enforce specific rules that made the world safe for large corporations and big banks. The benefits of benign markets were meant to extend beyond economics. The economic gains from hyper-globalization, neoliberals believed, would help to end international conflict and strengthen democratic forces around the world, especially in communist countries such as China.

The hyper-globalization narrative neither denied the importance of social equity, environmental protection and national security, nor contested governments’ responsibility to pursue them. But it assumed that these goals could be achieved through policy instruments that did not interfere with free trade and finance. Simply put, it would be possible to have one’s cake and eat it. And if the results were disappointing, as they turned out to be, the blame lay not with hyper-globalization, but with weak complementary and supporting policies in other domains.

Hyper-globalization, in retreat since the 2008 financial crisis, ultimately failed because it could not overcome its inherent contradictions. The governments that gave corporations the power to write these narrative were unlikely to persuade their authors to support domestic social and eco-friendly agendas.

As the world abandons hyper-globalization, what will replace it remains highly uncertain. One emerging economic-policy framework, which I have called ‘productivism’, emphasizes the role of governments in addressing inequality, public health and the clean-energy transition. By putting these neglected objectives front and centre, productivism reasserts domestic political priorities without being inimical to an open world economy. The Bretton Woods regime has shown that policies that support cohesive national economies also help promote world trade and capital flows.

Another emerging paradigm could be called hyper-realism, after the ‘realist’ school of international relations. This emphasizes the geopolitical rivalry between the US and China and applies a zero-sum logic to economic relations between major powers. This framework views economic inter-dependence not as a source of mutual gain but as a weapon that could be wielded to cripple adversaries, as the US did when it used export controls to block Chinese firms from accessing advanced chips and equipment to make them.

The path of the world economy will depend on how these competing policy frameworks play out on their own and against each other. Given the overlap between the two on trade, governments will most likely adopt a more protectionist approach over the next few years and increasingly embrace re-shoring as well as other industrial policies to promote advanced manufacturing. Governments will also likely adopt more green policies that favour domestic producers, such as the US Inflation Reduction Act, or erect barriers, as the EU does through its carbon border adjustment mechanism.

Ultimately, geopolitical aims will likely push other considerations aside, which may let the hyper-realist narrative prevail.

It is not clear, for example, that the current focus on advanced manufacturing that characterizes resurgent industrial policy will do much to reduce inequality within countries, given that good jobs are likely to sprout in service industries that have little to do with China rivalry.

Letting the national-security establishments of major powers hijack the economic narrative would endanger global stability. The result could be a dangerous world in which the threat of armed conflict between the US and China compels other countries to take sides in a fight that does not advance their interests.

Let’s correct the wrongs of hyper-globalization and establish a better global order based on a vision of shared prosperity, not let great powers squander this opportunity. ©2023/Project Syndicate